Author Question: Which of the following statements is true about purchasing power parity (PPP)? a. PPP is the normal ... (Read 45 times)

mspears3 · **on:** Jun 30, 2018

Which of the following statements is true about purchasing power parity (PPP)?
a. PPP is the normal state between two nations because international markets are perfectly competitive.
b. PPP is the normal state between two nations because of government regulations and central bank intervention.
c. PPP is the normal state between two nations because interest rates, the spot exchange rate, and the forward exchange rate all adjust to create this condition.
d. PPP is the normal state between two nations because arbitrageurs take advantage of any imbalances.
e. PPP is rarely the case for most nations in the short-run, but exchange rates tend to move in the direction of PPP in the long run.

Question 2

Which of the following is a shortcoming of the nominal, effective exchange rate?
a. The nominal, effective exchange rate does not take price differences into account.
b. The nominal, effective exchange rate as a measure is too narrow because it only shows changes in the value of one currency against one other currency.
c. The nominal, effective exchange rate is not easy to calculate because there are no data to determine the currency weights.
d. The nominal, effective exchange is not a meaningful measure because the differences in inflation are over-emphasized.